How Did The Ivy-10 Portfolio Perform in 2016?

It’s that time of year to update the performance of the Ivy-10 Portfolio.

What is the Ivy-10 Portfolio?

Back in 2012 I finished reading a very interesting book called “The Ivy Portfolio”. This book was written by two money managers, Mebane Faber and Eric Richardson, who work at Cambria Investment Management. The authors wanted to answer the question of why money managers who manage some of the world’s best Ivy League schools produce such consistent results. Routinely Harvard and Yale endowments produce double digit annual returns. Since 1985 Yale University has returned around 16% annual returns and Harvard over 15% annual returns. Not only did they produce outstanding returns, but they did it by also reducing volatility and drawdown.

This inspired me to create the Ivy-10 Portfolio which I track on System Trader Success. If you want to learn more about it, please read the original article here. In short, it’s a slightly modified version of the strategy with a shorter look-back period used for the moving average filter. The original rules used 10 months while my version used a 5-month look-back.

2016 Performance

Below is the performance summary for the year 2016 only. Please note, returns include dividends but exclude commissions and slippage. First up is the equity curve. The Ivy-10 Portfolio is the green-colored equity curve (Backtest) while the benchmark (SPY) is the blue equity curve.

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We can see the Ivy-10 languished just below the zero level (100) for 2016. On the other hand, the benchmark generally climbed higher through the entire year. Below is the performance summary for both the Ivy-10 and the benchmark.

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The Ivy-10 produced a CARG of -.2% while the Benchmark produce a 12.0%. In short, this strategy produced zero returns for the year. In fact, over the past two years, this portfolio has lost money.

Performance Since Financial Crash

Expanding our view out to the last major market bottom of 2009 we can see that the S&P (chart below) is performing better in terms of total return. It appears since late 2012 the Ivy-10 has not been able to gain any traction and then in 2015 a dramatic drawdown took place. In short, the last three years or so have seen the Ivy-10 portfolio really struggle.

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The portfolio experienced slightly lower drawdown than the benchmark and slightly lower CARG. The benchmark had a drawdown of 52.3% while the Ivy-10 had a drawdown of about 26.4%. The benchmark generated a CAGR of around 7.1% while the Ivy-10 Portfolio has generated a CAGR of 6.1%.

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Out-of-Sample Performance

The Ivy Portfolio book was published back in 2006. Since this portfolio concept was conceived before that date I think it’s safe to say we can use 2006 as the starting period for our out-of-sample data for the portfolio. Below are the results from 2006 through the close of 2016. Here you can clearly see the equity curve of both our portfolio and the benchmark have collided when our portfolio crashed. The recent drawdown in 2016 really took its toll on returns.

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Looking at the summary statistics below we can see both our benchmark and our portfolio are producing similar CARG. The max drawdown when compared to the benchmark is significantly better. Our portfolio experienced around 26% drawdown while our benchmark experienced a 55% drawdown during the financial panic.

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As the SPY climbs and scales to new highs over the past couple of years, the Ivy-10 Portfolio has struggled to keep up with those recent gains. Recent market activity of 2015 resulted in losing a good percentage of gains and 2016 the Ivy-10 portfolio languished. Only over the longer term horizon do we see both the benchmark and our Ivy-10 portfolio producing identical CARG. Once again, the original intent was to produce stock market index gains without the deep drawdown (55%) experienced with our benchmark.

What About The Original Ivy Portfolio?

Remember, the study above is NOT the original rules for the Ivy Portfolio. The original rules used a 10-month moving average as a filter while our strategy used a 5-month moving average. This made me wonder how well the original rules held up through 2016. Let’s see.

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Here we can see the original rules performed similar with regards to CARG. Our portfolio produced a 6.9% CAGR for the original rules and 7.3% for the modified rules. The original rules also score points in producing a smaller drawdown. The max drawdown for the original rules is a reasonable 17% instead of 26% with the modified Ivy-10 rules.

So, which system is better? It’s looking like the orginal rules are producing better. You get about the same amount of reutrn with less drawdown. It will be interesting to see if the Ivy-10 and Ivy Portfolios will bounce back over the next year or two.

Get The Book

If this topic interests you at all, you can get a copy of the book, The Ivy Portfolio, which describes the concepts and backtesting that inspired the Ivy-10 Portfolio.

Jeff is the founder of System Trader Success - a website and mission to empowering the retail trader with the proper knowledge and tools to become a profitable trader the world of quantitative/automated trading.

This may explain why Harvard has decided to outsource management of its foundation. Ivy5 got whipsawed by the momentum crash and then got whipsawed by gold and bonds if I’m not mistaken. In any event, it is more evidence of the fact that systems work until they don’t.

Dear Mr. Swanson, I like to follow your ideas and your backtests about the IVY-Portfolios. May I ask you which software you used to produce such portfolio backtests of 5 or 10 ETFs (the green curves on your website).Thanks, Urban